Unreliable electricity and water, clogged roads, inefficient ports: India’s infrastructure woes have stretched back over decades. But Subir Gokarn, the IMF’s executive director for India, thinks his country may have finally gotten the recipe right.
Gokarn spoke at the Nand and Jeet Khemka Distinguished Speaker Forum, held at the Columbia Club and organized by the Chazen Institute for Global Business.
Earlier this year, the Indian government committed 200 billion rupees (nearly US$3 billion) to a new entity, the National Infrastructure and Investment Fund (NIIF). No more than 49 percent of the capital will be contributed by the government, with the rest coming from local and international investors, including sovereign wealth funds and international bond holders.
The approach follows the “First Public, Then Private” (FPTP) model — the fourth iteration in India’s attempt to fulfill the country’s massive infrastructure development needs.
Learning from Mistakes
In his talk, Gokarn outlined the first three phases of the country’s infrastructure financing policies and pinpointed why each one failed.
Phase 1: Public-only Through the early 1990s, infrastructure development was exclusively a government function. Although roads, ports and railroads were built, “the gap between supply and demand grew,” said Gokarn, as India’s GDP charged ahead.
Phase 2: Private-only By the mid-1990s, India was undergoing a wave of reforms that catalyzed a total about-face as far in infrastructure. “India put the bet entirely on private-sector development,” Gokarn said. Although the experiment was not a total failure, especially in areas such as telecom expansion, private contractors ignored other sectors, particularly those with high upfront costs, labyrinth bureaucracy and long lead-times before cash starts flowing.
Phase 3: Public-private partnerships The third phase kicked off in the mid-2000s, when the 3 P’s came together for the first time. The government’s role was to make life a little easier for private-sector constructors by setting up the legal framework and guiding the critical land-acquisition aspect of projects. This approach “didn’t quite work,” Gokarn said, since the public sector could not guarantee the promised jobs, much less exert any control over how the construction progressed.
In this stage, the private sector side still responsible for the money, but lacking a local bond market, developers borrowed from India’s inexperienced commercial banks. Unable to calculate the risks correctly — including the likelihood that most projects would take years longer than promised to make enough money to repay loans — the banks floundered. By last year, Gokarn estimated, 17 percent of Indian bank exposure was to infrastructure loans, and half of that was considered nonperforming assets.
The New Model
What to do? With the risk appetite of local banks anemic, most commissioned projects remained on the drawing board or partially finished. The dilemma spread beyond infrastructure lending as banks grew increasingly cautious, unable or unwilling to lend even to non-infrastructure entities.
The current approach follows the “First Public, Then Private” (FPTP) model, putting the public-sector back in the financing business. The government still manages early-stage approvals but now hires commercial contractors rather than equity partners to build and run the projects. NIIF continues to hold ownership and obligations of projects until they reach positive cash flow. At that point, the fund intends to sell the now-viable infrastructure, using any investment infusions to back new projects.
Gokarn, a former deputy governor of the Reserve Bank of India, said the FPTP approach “lets the government get back to what it does well,” namely using its budgetary might to see projects through to multi-year completion, and harnesses the private-sector skills needed to build and manage the projects. Then it wipes clean the public-sector ownership burdens and lets private enterprise take over. “Think of it as sequential rather than simultaneous PPP,” he said.
Gokarn also applauded the portfolio nature of the fund, which he said is designed to attract outside debt and equity financing from foreign institutions and deep-pocketed local investors such as pension funds that traditionally take a long-term approach anyway. “Investors are able to spread their risk over a pool of projects rather than fund a single development in a specific geography,” he explained.
Of course it’s early days, yet, with commissioning of projects still underway and at least one or two years before Gokarn expects any projects to be sold to the private sector. Numerous issues must still be sorted out, including resolving territorial and political differences between the national government and states and anticipated populace impatience. India’s lack of a thriving bond market means the fund will necessarily have to go global to tap investors.
But, beyond the NIIF, Gokarn has seen some progress already thanks to the Modi government push. “India has taken big steps in making utilities viable,” he said. “Road construction has risen to 30 kilometers a day or more, from 2 kilometers.”
Pointing out that attracting foreign investors and local corporate greenfield and brownfield expansion requires modernization of the subcontinent’s infrastructure, Gokarn expects big benefits from the fund. “It’s the shot India needs to be the world’s fastest growing large economy.”